Chart Presentation: 1989 – 1990

We are going to return to a chart comparison that we included- briefly- in yesterday’s issue. At right are two charts of the CRB Index (commodity prices).

The top chart runs from late 1988 into early 1991. The starting point for the argument is the end of 1988 which lines up with the peak for copper prices through January of 1989.

The middle chart of the CRB Index starts in early 2006 and runs to the current day. On this chart we use the peak for copper prices in May of 2006 as the starting point.

The idea is that the 1990 equity bear market came at the end of a sequence for commodity prices that began with the peak in copper prices at the end of 1988, a broad commodity markets decline into the autumn of 1989, and then a rally that extended through into October of 1990. Note that October of 1990 marked not only the peak for crude oil prices but also the low point for the S&P 500 Index.

If history were to be kind enough to repeat we would expect to see a top for copper prices close to 7 quarters ahead of the equity markets bottom. Once copper prices had reached a peak- in May of 2006 in this example- the trend would turn lower for roughly 8 months and then swing upwards for a year or so until the equity markets had reached a bottom.

The point is that for as much as this time is apparently different and for as often as we read and hear that this is a secular or structural commodity ‘bull’ instead of a relatively normal cycle we can still make a reasonable case that chart-wise the markets have followed the same path as 1989- 1990 and on the final break lower for commodity prices the equity markets turned rather sharply higher.

In our short-term views section we have been following the daily progression of the CRB Index as it traces out a potential ‘crash top’. In theory… if the CRB Index were to fail to make new highs over the next week or so and then snap down through the March lows it could quite easily break all the way down to the 300- 310 level. Strangely enough this wouldn’t invalidate the long-term bullish argument for commodity prices in the same way that the 1987 stock market didn’t mark any kind of meaningful top for the equity markets but it certainly would help to clean out some of the speculative momentum players.

Below we show the U.S. 30-year T-Bond futures and the stock price of Micron (MU).

The argument is that MU has been trending lower as bond prices have been rising so if MU stops trending lower by breaking back up through the resistance line… one could conclude that long-term Treasury prices are at a top. Obviously there is a significant difference between no longer going down and actually going up because MU could shift into a flat trend below its 200-day e.m.a. line for an extended period of time but our view is that MU above 7 should indicate that upward pressure on Treasury prices is abating.

The biotechs were certainly better yesterday as the market began to look for something else to do besides chase commodity prices higher. We are not sure whether Genentech’s earnings released after the close will be a positive, negative, or non-event but for the day at least the biotechs were better. Amgen, shown below right along with gasoline futures, has been trending inversely to energy prices for the past year and a half so when it gaps to the upside we take it as almost a given that energy prices are going to show some amount of weakness.

The broader point is that AMGN and gasoline futures have been trending in opposite directions and if AMGN were to return to or break above its 200-day e.m.a. line then we would expect gasoline futures to move back to or below the 2.30 level.

Typically the first stocks to new highs after a sharp correction represent the relative strength or momentum leadership. Potash Corp. (POT) was an early leader along with Wal Mart (WMT) with the latter serving as something of a surprise to most. Another stock capable of reaching new highs in the short-term is IBM which continues to crowd the 120 level. We note below that the broad trend for IBM is quite similar to Intel so, in a sense, IBM above 120 would be a significant positive for the chip sector.